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Editorial 8 MIN READ

Delaware's response to TCJA: nothing, quietly

While Hartford and Trenton scramble to rewrite their tax codes, Dover is drafting its usual August DGCL bill and not much else

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. What the other states are doing
  2. What Delaware did not do
  3. The 2018 DGCL bill, as of March
  4. Why quiet is the point
  5. What stays the same, concretely
  6. The one thing worth watching
  7. Sources

hree months after the Tax Cuts and Jobs Act became Public Law 115-97, the legislative response from Dover is conspicuous for its absence. No franchise-tax rewrite. No pass-through workaround bill. No emergency conformity package. The 2018 DGCL amendment cycle is moving on its usual schedule, and the content looks like a typical Corporation Law Council clean-up rather than a response to Washington.

That is the story, for anyone watching Delaware through the lens of the federal tax bill. The quiet is deliberate.

What the other states are doing

Connecticut moved first and fastest. Senate Bill 11, introduced in the February session and signed by Governor Malloy on May 31, 2018, imposes an entity-level 6.99% tax on pass-through income with a corresponding credit for owners, a direct structural response to the $10,000 SALT deduction cap in IRC § 164(b)(6). The mechanic is simple in outline and contested in detail: move the state tax from a capped individual deduction to an uncapped business-level deduction, and trust that Treasury will not unwind the workaround in regulations. New Jersey has a similar Business Alternative Income Tax bill circulating in Trenton, and New York is negotiating an employer-side payroll-tax substitute in its FY2019 budget talks this month.

California, Maryland, and Illinois have pass-through workaround conversations underway. The IRS issued Notice 2018-54 on May 23 (not yet, from the vantage point of this article; state PTET drafting is running ahead of Treasury's warning shot) and the legal uncertainty is part of the pressure every capital is responding to.

Dover is not in the list.

What Delaware did not do

Delaware did not introduce a pass-through entity tax bill. It did not propose a conformity package to align the state income-tax base with the new federal definitions in TCJA. It did not adjust the LLC annual tax, which remains a flat $300 under 6 Del. C. § 18-1107. It did not touch the corporate franchise-tax schedule in 8 Del. C. § 503, which still runs from a $175 minimum under the authorized-shares method to a $200,000 cap, with the assumed-par-value method offering a lower number for most venture-backed C-corps. Both methods were in place before TCJA, both methods remain in place after, and the arithmetic that produces February panic notices for founders with 10 million authorized shares is unchanged.

The Delaware corporate income tax, codified at 30 Del. C. § 1902, still sits at 8.7% on Delaware-source income, unaltered by the 2018 session so far. For most Delaware-formed entities this is academic, because the state does not tax entities that are formed in Delaware but have no Delaware business activity. The 1942 decision in Wilmington Trust Co. v. Highfield and the headquarters-exemption lineage that followed mean a Delaware C-corp with operations only in California pays California tax, not Delaware tax, on its operating income.

The franchise tax is where Delaware actually collects from its formation base, and the franchise tax is explicitly not an income tax. It is a privilege fee calibrated to authorized capital or assumed par value, and TCJA's changes to federal taxable income do not flow through to it. A state that collected its formation revenue through a corporate income tax would have had to respond to TCJA's base-broadening provisions. A state that collects through a franchise tax, indifferent to federal taxable income, did not.

The 2018 DGCL bill, as of March

The Delaware State Bar Association's Corporation Law Section publishes its proposed amendments to the General Corporation Law and the LLC Act on a predictable annual cadence. The Section drafts through the winter, circulates to the Corporation Law Council in the spring, passes both chambers in June, and takes effect August 1. The 2017 cycle produced Senate Bill 69 (DGCL) and Senate Bill 72 (LLC Act), both signed by Governor Carney on July 21, 2017 and effective August 1, 2017. The 2018 cycle is following the same calendar.

Early drafts circulating this month show the 2018 DGCL amendments focused on three quieter areas: clean-up language around the ratification procedures in §§ 204 and 205, refinements to the consent and notice provisions in §§ 141 and 228, and a technical provision addressing blockchain-based stock ledgers, following on the 2017 amendments to §§ 219 and 224 that first authorized distributed-ledger recordkeeping. None of that is a TCJA response. None of it requires reopening the franchise-tax structure.

The LLC Act amendments in the parallel bill are similarly incremental. There is a proposed division statute (analogous to the Texas model), tightening of the registered-series mechanic, and a handful of drafting fixes that respond to specific Court of Chancery opinions from the prior year. For readers tracking the DGCL cadence, this is the same rhythm as the 2017 LLC Act amendments: Council-driven, narrowly scoped, operational rather than strategic.

Why quiet is the point

Delaware's value proposition is not that it adjusts faster than other states. It is that the things a sophisticated counterparty relies on will be there next year, and the year after, and the year after that. The corporate bar writes the amendments; the Council reviews them; the General Assembly passes them with close to unanimous votes; the Governor signs them in June for August effectiveness. The system is boring on purpose.

A franchise-tax rewrite in response to a federal tax bill would signal that Delaware is in a competition with other states on tax terms. It is not, and the state has been careful not to act as if it were. The formation premium that Delaware charges, roughly $300 a year for an LLC and a $400 minimum plus assumed-par-value math for a C-corp, is a price-for-predictability arrangement. Stability is the product.

There is also no political urgency to act. Delaware's income-tax exposure from TCJA is limited because most Delaware-formed entities are not Delaware taxpayers. Delaware's franchise-tax exposure is nil because the franchise tax is not tied to federal taxable income. The bond market, which cares about Delaware's AAA general-obligation rating, has signaled no alarm about TCJA-era revenue. The Delaware Economic and Financial Advisory Council's March 2018 revenue update did not flag franchise-tax erosion.

Compare the Connecticut situation. Connecticut's corporate and personal income taxes track federal taxable income closely, which means TCJA's base-broadening (the § 199A deduction, the new interest-expense limitation in § 163(j), the loss of miscellaneous itemized deductions, the expanded § 168(k) bonus depreciation) all flow through to the Connecticut base unless the state acts. Every state with an income tax pegged to federal conformity had to decide in January and February whether to conform, decouple, or mix-and-match. Delaware faced that decision too, at the margin, for the subset of entities actually doing business in Delaware; but the dollars are a rounding error on the franchise base.

What stays the same, concretely

A Delaware LLC formed in March 2018 files a one-page Certificate of Formation, pays a $90 filing fee, and owes its first $300 annual tax on June 1, 2019. Expedited options are unchanged: $50 for 24-hour, $100 for same-day, $200 for two-hour, $500 for one-hour, $1,000 for half-hour. The registered-agent market continues to price between roughly $50 at the commodity end and several hundred at the full-service end, and the service levels continue to matter when a federal tax notice arrives in the mail.

A Delaware C-corp formed this week files the same Certificate of Incorporation it would have filed in December 2017. The authorized-shares default on the February franchise-tax notice will still generate the same sticker-shock number for a 10-million-authorized-share cap table. The assumed-par-value method under 8 Del. C. § 503(a)(2) still brings most early-stage companies down to or near the $400 minimum. None of this has moved.

What has moved is the federal backdrop. A Delaware C-corp now pays 21% under IRC § 11 rather than 35%, which changes the C-versus-pass-through math materially. The § 199A deduction for qualified business income changes the pass-through math in the opposite direction, and the interaction is messy enough that every tax lawyer in the country has spent January and February rewriting choice-of-entity memos. The Delaware franchise tax sits outside all of that. It does not care what your federal rate is. It charges you for the privilege of being a Delaware entity, and the privilege is priced the same as it was in December.

For a founder choosing between Delaware and a home-state LLC this quarter, TCJA has not changed the Delaware side of the ledger. The home-state side may have moved (if your home state is Connecticut, considerably; if your home state has no income tax, less so), and that is where the analysis happens.

The one thing worth watching

If Delaware does do something TCJA-adjacent in the 2018 session, it will come through the Division of Revenue's guidance rather than through the General Assembly. Delaware's income-tax conformity to the Internal Revenue Code is handled under 30 Del. C. § 1101, which ties the state definition of taxable income to the federal definition as of a specified date. When the federal code changes materially, the Division typically issues a technical information memorandum clarifying which federal changes Delaware is or is not absorbing for the current year. That memorandum has not yet issued for TCJA as of this writing. When it does, it will be narrower than a statute and will not touch the franchise base.

The DGCL bill will pass in June, take effect August 1, and add three or four lines to the LLC Act and six or seven to the corporation law. None of those lines will mention TCJA. If the Corporation Law Council does its usual job, none of them will mention any federal statute at all.

That is the shape of Delaware's response to the largest federal tax rewrite in thirty-one years: a signed bill from the Governor in late June, on operational details that were already in the pipeline before Congress acted, with the franchise-tax machinery left untouched because nothing about the federal change requires touching it. Jurisdictions that need to react react. Delaware, by design, does not.

Sources

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